The Euro has been hit lately on two fronts:
- Christine Lagarde’s extreme dovishness towards the stance of the ECB
- The reemergence of the coronavirus
Christine Lagarde spoke last week in front of the Frankfurt European Banking Congress. She said that although inflation was unwelcome and painful, the ECB must not rush into a premature tightening. In addition, she added that inflation was likely rise into the end of the year. October’s inflation reading was 4.1% YoY. The ECB targets 2% inflation! However, she stated that “conditions to raise rates are very unlikely to be satisfied next year”. The ECB’s Pandemic Emergency Program (PEPP) is set to expire the end of March 2022. At the upcoming ECB meeting slated for December 16th, members will provide undated forecasts for growth and inflation. As November’s meeting, Lagarde noted that she expects PEPP to end as scheduled and that members will discuss new possible bond buying alternatives at the December meeting!
Everything you need to know about the ECB
The coronavirus is back in Europe, on what some are calling a 4th wave. Austria has shut down for 20 days, beginning today. Germany is ready to re-impose restrictions and has not ruled out another lockdown! In addition to Austria and Germany, new records are being set for daily new Covid cases in Czech Republic, Netherlands, and Belgium. Not only do Europeans have the virus to worry about, but now rioters are out in force who are opposed to social restrictions and lockdowns. Will there be more lockdowns to come?
One more thing to watch this week in Europe: the buildup of Russian military forces on the Ukraine border. Will they move into Ukraine? Recall that in 2014, Russian forces annexed Crimea from Ukraine. Euro could move on uncertainty.
Economic trends seem to be moving in the opposite direction in New Zealand, although inflation is high as well. At the last RBNZ meeting, the committee said they expect inflation to rise to 4% in the near-term and fall back to 2% in the medium-term. Business Inflation expectations for Q4 rose to 2.96% vs expectations of 2.4% previously. For Q3 the reading was 2.27%. The Employment Change for Q2 was +2% vs +0.4% expected and the unemployment rate fell from 3.9%. to 3.4%. Expectations are for the RBNZ to hike 25bps. But traders are also speculating that that they may hike 50bps!
In March 2020, EUR/NZD put in a high of 1.9932 and has been moving lower since. However, since the beginning of 2021, the pair had been moving in a sideways channel between 1.6307 and 1.7152. As expectations decreased that the ECB would raise interest rates over the course of the next year, the EUR/NZD began to fall. On October 19th, the pair broke below the channel. As the pair reached the 61.8% Fibonacci retracement from the April 2015 lows to the March 2020 highs near 1.6285 and the RSI moved into oversold territory, it consolidated, forming a flag pattern. On November 16th, EUR/NZD broke below the flag and now targets 1.5575.
On a 240-minute timeframe, EUR/CHF has is holding support at the 127.2% Fibonacci extension from the lows of February 24th to the highs of August 20th near 1.6090. Additional support is at 1.5900 (see daily) and they the 161.8% Fibonacci extension from the previously mentioned timeframe at 1.5803. Resistance is at recent highs near 1.6343 and then the 200 Day Moving Average at 1.6432.
If Christine Lagarde and the ECB continue to be dovish moving into the December 16th meeting, the Euro should continue to move lower. And, if the inflation forecasts at the meeting are higher and the growth forecasts are lower, this also should add pressure to the euro. The RBNZ meets on Wednesday. The question is not if they will raise rates, but will they raise 25bps or 50bps? Regardless, given the difference in interest rate policy, and the ongoing coronavirus concerns in Europe, there is a possibility for EUR/NZD to head towards the flag target!